Mvela boss rails against 'fatal flaw'

Brendan Ryan | Wed, 05 Aug 2009 15:41
[miningmx.com] -- REASONS given for Mvelaphanda Resources’ (Mvela's) demise are couched in business terms, such as “collapsing the pyramid structure to unlock value” and “unbundling assets to shareholders to remove discounts to net asset value”.

But the bigger picture concerns whether Mvela delivered on what the South African government wanted to achieve in terms of its reforming legislation intended to promote black empowerment in the country’s mining sector.

That legislation was supposed to encourage the development of viable, black-controlled mining groups and not hinder it.

Mvela was the first empowered mining group to list on the JSE following the creation of Mvelaphanda Holdings in 1998 by Tokyo Sexwale – the former politician turned businessman who has now returned to politics as a minister in President Jacob Zuma’s new cabinet.

Mvela CEO Pine Pienaar emphatically states the group has been successful but he highlights a “fatal flaw” in the legislation – the Minerals and Petroleum Resources Development Act (MPRDA) and associated Mining Charter – that’s forced Mvela into the situation it now finds itself in.

Pienaar says: “The fatal flaw in the Mining Charter is the obsession with measuring black empowerment in terms of percentage equity stakes instead of taking an approach based on value. I think it’s often far better to have a 5% stake in a strong business than 51% of a weak business.

“You need to be able to dilute for value and I hope that, over time, the politicians will accept that and realise there are enough other checks and balances in place to achieve their empowerment aims.”

Pienaar says the need for Mvela to maintain its high empowerment shareholding was a major constraint on the group.

Mvela’s controlling empowerment shareholders – Afripalm Resources and Mvelaphanda Holdings – are short on funds, which put severe limitations on what Mvela could do without diluting the equity stakes of the two major shareholders that had to be maintained to meet legal empowerment requirements.

Says Pienaar: “We couldn’t go to the market and raise capital to strengthen our balance sheet – as a number of mining groups have done so far this year – because that would have diluted our major shareholders.

"While the debt held by our major shareholders is off Mvela’s balance sheet we had to take into consideration their financial positions in whatever we wanted to do, which meant that debt was effectively on Mvela’s balance sheet.”

Pienaar also criticised the approach by government, which branded Mvela and some other established empowerment groups, as “the usual suspects” that were moved to the back of the queue for new empowerment deals.

“That made it very difficult for us to do more deals. Doors were slammed in our face without good reason.”

Mvela's best success

Pienaar viewed Mvela’s greatest success as being the establishment of Northam Platinum (Northam) as a fully independent operation that owns mines, smelts and refines its own metals and has secured its long-term economic future through the acquisition of the Booysendal deposit.

Pienaar says: “From the outset the strategy was all about getting outright control of Northam so as to be in a situation where we had the ability to take decisions on its future. You can’t do that if you’re still tied down through agreements with joint venture partners.

“We achieved that without the need for vendor finance. With vendor finance comes constraints and you’re never independent. What happens at Booysendal is our call. We don’t have to get approval from joint venture partners, who may have their own agendas.”

The fatal flaw in the Mining Charter is the obsession with measuring black empowerment in terms of percentage equity stakes instead of taking an approach based on value

The main reason for the unbundling is to get rid of the persistent discount to NAV at which Mvela shares have traded for years because investors can buy directly into its underlying operations – Gold Fields, Northam and diamond producer Trans Hex – and don’t have to buy Mvela shares to get exposure.

The intention to unbundle was announced in February, but that was followed in May by the news Mvela was looking at a possible large acquisition that could allow it to stay in operation and listed after unbundling its Northam shares.

That wasn’t to be and Mvela announced in June the potential deal was off and the unbundling would take place as previously planned.

Pienaar says: “The merits were there but under current market conditions the less risky and faster way of unlocking shareholder value was to go for the unbundling, because we could manage that process more easily.”

Market speculation had identified the target as Optimum Colliery, which produces around 11.6 million tonnes/year of coal that’s sold mainly to Eskom and export customers. Pienaar has refused to comment.

Pienaar joined Mvela in February 2004 and was appointed CEO in April 2005. Prior to that he was the new business executive at Harmony and a non-executive director of the former Avmin, now African Rainbow Minerals.

Reviewing his time running Mvela, Pienaar says much of it had been spent “protecting value and not enhancing it”. The biggest threat was Harmony’s hostile bid for Gold Fields. Mvela was Gold Fields’ empowerment partner and eventually acquired 50m shares in Gold Fields, which are currently being sold. After paying off its own debt, Mvela could realise a profit of between R1bn and R1.5bn from the sale of the Gold Fields shares.

Says Pienaar: “That was a life or death struggle for us, because had Harmony succeeded it would have destroyed our value proposition. We were partners with Gold Fields in fighting off Harmony.”

Pienaar (46) has stepped down as CEO but will consult to Mvela for six months while the unbundling process is carried out. He won’t be specific on his future plans at this stage.

He says: “Mining is my passion and I’ve started looking at opportunities in South and southern Africa, which are my areas of expertise. I’m a long-term value player – not a trader or a speculator. I want to build mining companies that are sustainable over the long term, being able to survive uncertain times and benefit when commodity prices rise.”